2.11.4 Accrued Interest
Most bonds trade “and interest,” which means that the price includes any interest that has accrued on the bond from the time interest was last paid until the day before the settlement date.
Most bonds pay interest every six months according to one of the following schedules:
|
Bond Interest Payment Schedule |
|
|
Months in which interest is paid |
Short name for this type of bond |
|
January and July |
J&J bonds |
|
February and August |
F&A bonds |
|
March and September |
M&S bonds |
|
April and October |
A&O bonds |
|
May and November |
M&N bonds |
|
June and December |
J&D bonds |
If a trade occurs in the middle of July for an M&N bond, the seller is entitled to the amount of interest accrued from the last interest payment until the day before the bond settles. Therefore, the buyer would have to add the amount of interest owed to the seller to the price of the transaction.
Accrued interest is added to the amount on the buyer’s sales confirmation because the buyer must pay the price of the security plus the added interest. Accrued interest is also added to the amount on the seller’s confirmation because he receives the price of the security plus the accrued interest.
Accrued interest is calculated from the prior interest payment date to the day before the settlement date. For calculating interest on corporate bonds, each month is assumed to have 30 days, and a year is assumed to have 360 days. Therefore, if an A&O bond trade settles on June 15, the seller will be entitled